Quick Facts

Cambodia’s economic freedom score is 57.5, making its economy the 110th freest in the 2015 Index. Its overall score is essentially unchanged from last year, with improvements in labor freedom and freedom from corruption largely offset by declines in business freedom and property rights. Cambodia is ranked 23rd out of 42 countries in the Asia–Pacific region, and its overall score is lower than the regional average.

Over the past five years, economic freedom in Cambodia has stagnated, with potential gains from a liberalized labor market and a small opening to international markets undermined by a weakening business environment, looser fiscal policy, and a decline in property rights.

Little progress has been made in tackling corruption, which is by far the most serious threat to advancing economic freedom in Cambodia. The government must do more to strengthen the institutional environment underpinning the rule of law, including improving the judiciary and reinforcing property rights. These issues, along with a poor business environment and government interference in the economy, continue to undermine the dynamic investment flows enjoyed by regional neighbors.

Background

Between 1975 and 1979, Pol Pot’s Khmer Rouge regime killed an estimated 3 million Cambodians. The Khmer Rouge Tribunal, established under an agreement with the United Nations to prosecute senior officials involved in the atrocities, has been slow to deliver justice. Though it is nominally a democracy, Cambodia has been ruled by former Khmer Rouge member and Vietnamese puppet Prime Minister Hun Sen since 1993. The 2013 election nearly unseated Hun Sen and remains hotly contested by the opposition party. In 2012, Cambodia took its turn chairing the Association of Southeast Asian Nations, drawing increased international attention to and criticism of its undemocratic policies and close ties to China. Cambodia’s economy depends heavily on tourism and apparel assembly.

The perverse effects of decades of international intervention and foreign aid have contributed to rampant corruption in Cambodia. Three new judicial “reform” laws approved in 2014 will further entrench the ruling party. Weak and inconsistent courts do not protect private property effectively. Investments in many economic sectors frequently are accompanied by land grabs by powerful politicians, bureaucrats, and military officers.

The top individual and corporate income tax rates are 20 percent. Businesses in the petroleum and gas sectors are assessed at a 30 percent rate. Other taxes include a value-added tax and an excise tax. Total tax revenue equals 12.2 percent of GDP. Government expenditures amount to around 20 percent of the domestic economy, and public debt is equivalent to 28 percent of total domestic output.

Red tape and inconsistent enforcement of the laws hinder the development of a critically needed private sector. The formal labor market remains distorted by state intervention that sets public-sector wages and influences wage-setting in the market. Enforcement of the labor code remains ineffective. Although most prices are determined by the market, the government has been increasing subsidies for fuel.

Cambodia has an average tariff rate of 8.9 percent. Non-tariff barriers at the border further restrict trade. The slow-moving bureaucracy and court system present challenges for foreign investors. Development of the financial sector has progressed gradually, although large state banks have recorded notable growth and continue to dominate the banking system.